(Bloomberg) – Bexar County Hospital District, which encompasses San Antonio, the seventh most-populous U.S. city, cut its borrowing costs 23 percent from 2009 as it sold $205 million in Build Americas amid plunging municipal issuance.

States and municipalities are set to sell about $1.9 billion next week, the lowest total for a full trading week since Dec. 19, 2008, according to data compiled by Bloomberg. About $7.1 billion in debt was issued this week, including $1.2 billion marketed only to investors in Puerto Rico.

Concern that the U.S. recovery is slowing has driven investors to Treasury and municipal debt, sending yields to historic lows. Average Build America yields touched a record-low of 5.54 percent Aug. 24, according to the Wells Fargo Build America Bond index, which began about a year ago.

“The market has been very strong even at these new levels,” said Regina Shafer, assistant vice president of fixed- income investments for USAA Investment Management Co. in San Antonio.

Investor demand combined with a shortage of supply further depressed yields, said Shafer, who manages $5.3 billion of tax- exempt municipal bonds.

The Bexar hospital district, which operates as the University Health System, sold bonds due in 2040 priced to yield 5.41 percent, or 185 basis points above 30-year U.S. Treasuries. The district also sold 30-year Build Americas last August, which were priced to yield 6.9 percent, or 240 basis points above the benchmark. A basis point is 0.01 percentage point.

Seeking a Haven

Investors seeking a haven amid speculation of a renewed U.S. recession were drawn to Bexar’s sale, according to Raul Villasenor, senior vice president of First Southwest Co. in San Antonio, the financial adviser on the deal.

“There’s no question this is a very strong underlying credit,” Villasenor said. “Otherwise we would have seen spreads a lot higher. We’re very pleased with that.”

Top-rated Austin, the capital of Texas, yesterday sold about $80 million in tax-exempt public improvement bonds, with 10-year securities priced to yield 2.37 percent, 21 basis points below an index of AAA debt, according to Concord, Massachusetts- based Municipal Market Advisors. The index, which began in January 2001, is at the lowest level ever.

“It’s still a time to be very careful, but investors are realizing municipal bonds aren’t that risky,” Shafer said.

Build Americas

Bexar’s sale comes with the future of the Build America Bonds still undetermined.

The program was created last year as part of President Barack Obama’s economic-stimulus package. Issuers, which are eligible for a 35 percent federal subsidy on interest costs, have sold about $130 billion of the taxable securities. A bill was introduced in the U.S. House of Representatives July 28 to extend the program by two years.

Bexar’s Build Americas include an “extraordinary redemption” of 100 basis points above Treasuries, according to a release from Siebert Brandford Shank & Co., which marketed the sale to investors. Such a redemption would protect the district from the elimination of federal subsidy payments.

Yesterday’s offering was the district’s final debt sale to fund a $899 million capital plan, according to an Aug. 16 report from Fitch Ratings, which ranked the bonds AAA. About $770 million for the plan is financed by tax-supported debt, with an additional $130 million coming from cash reserves, the report said.

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(Bloomberg) – Build America Bond subsidies are rarely withheld and concerns among states about it are “overblown,” a U.S. Treasury Department official said, moving to quell worries about the reliability of the payments.

Money has been held back from only seven of the 278 Build America subsidy payments sought by states, Alan Krueger, Assistant Treasury Secretary for Economic Policy, said in a speech today to the National Association of State Treasurers. “Hardly any payments” have been withheld to satisfy other debts owed to the government, he said, as the Treasury paid 99.95 percent of the $626.45 million requested by states.

“A small number of officials have raised concerns that BABs subsidies would be offset because the government entity owes the federal government tax or other revenue,” Krueger said in the speech at a meeting in Williamsburg, Virginia. He said this criticism “has been overblown.”

Krueger addressed worries about the Build America program, which began last year and has become the fastest-growing part of the $2.8 trillion municipal market. Issuers receive a 35 percent subsidy from the Treasury Department for interest costs on the debt, which is used for construction projects. States and local governments have sold $129 billion of the securities.

Subsidy Withholding

There has been some concern among officials that the Treasury may withhold subsidies in cases where the states owe money. In May, Florida’s debt manager, Ben Watkins, said Florida would stop selling the securities because of those concerns. Krueger said the payment statistics should ease such worries.

“The Build America Bonds program has been a great success,” he said in his speech. “It is hard to look at these statistics and not conclude that the risk of offsets under the BABs program has been very minor.”

The program is set to expire at the end of the year unless Congress passes a proposed extension. Legislation to prolong it has been approved in the House of Representatives, only to run aground in the Senate.

Krueger said he’s “hopeful” that the program will be extended, though he acknowledged it has been difficult for Democrats, who control both chambers, to get the 60 votes needed to overcome stalling tactics in the Senate. Local-government groups have lobbied for keeping the program alive. After returning from an August recess next month, the House may vote on a new bill to prolong the program through 2012. Passage would give Senate supporters another chance to bring it to a vote.

Bipartisan Support, Once

“The BABs program, when it was initially authorized, had bipartisan support,” Krueger said. “The only thing we have learned since then is that it’s been successful.”

“I would think that would bring more support to the program,” he said. “But finding 60 votes has not been so easy in the Senate.”

Krueger also addressed criticism that the program produced high fees for Wall Street investment banks. Initially, Build America debt underwriting expenses were higher because of the start-up costs for using new financial products, he said. More recently, the costs have fallen amid competition from banks seeking to sell the bonds.

“Even taking underwriting fees into account, state and local governments have still saved over $12 billion in present value from issuing BABs,” Krueger said.

(Reuters) – Less than 1 percent of the subsidy payments owed to city, state and local governments for the Build America Bonds stimulus program have been withheld, according to the U.S. Treasury Department.

“Despite over $120 billion of BABs issuance to date, hardly any payments have been offset,” said Assistant Secretary for Economic Policy Alan Krueger in a speech to be given to the National Association of State Treasurers.

“Only .05 percent of total BABs subsidy payments requested by states have been offset because of outstanding tax debts owed to the IRS,” he said.

The taxable bonds, created as part of last year’s economic stimulus plan, pay issuers a federal rebate of 35 percent of interest costs. Lured by such a steep subsidy, issuers have brought more than $120 billion to market since the first BABs sale in the spring of 2009. But recently some states, notably Florida, have raised concerns about federal offsets.

The payments are treated as tax refunds, which means that the federal government checks if a state owes it money and then deducts that amount from the refund. According to Krueger of the total $626.45 million in BABs subsidy payments issuers have requested, some $626.15 million has been paid.

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(Bloomberg) – Build America Bonds, the fastest- growing part of the $2.8 trillion municipal debt market, will cost the federal government $36 billion through 2019, $6 billion more than forecast, the Congressional Budget Office said.

The U.S. subsidizes 35 percent of the interest cost of the taxable Build America securities, which were authorized under the economic stimulus legislation signed by President Barack Obama last year. Issuers have sold about $128.5 billion of the debt, according to data compiled by Bloomberg.

Federal spending on Build Americas will rise to $2 billion for the 2010 fiscal year ending Sept. 30, from less than $500 million in 2009, the non-partisan agency said yesterday in its semi-annual budget report. From 2009 to 2019, the total cost will grow to $36 billion, up from a $30 billion estimate in January. The Bond Buyer newspaper reported the findings earlier.

According to the CBO’s March analysis of Obama’s fiscal 2011 budget, his plan to expand and permanently extend the program — as well as lower the subsidy to 28 percent — would increase revenue by $80 billion over the 2011-2020 period. More than two-thirds of the Build America program’s cost is currently offset by higher tax revenue, according to the CBO.

The House of Representatives postponed on July 29 a vote to extend the Build America program for two years beyond its Dec. 31 expiration. Two previous extensions sought by the House were killed in the Senate.

Independent researcher CreditSights Inc. forecast on July 29 that total issuance would reach $165 billion by year-end, as borrowers come to market before the program is set to cease.

Build Americas yield about 5.63 percent on average, according to the Wells Fargo Build America Bond index. The index has an average maturity of 28.8 years and an average credit rating of Aa3 and AA- from Moody’s and S&P, respectively. Both ratings are the fourth-highest investment grades.
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(Bond Buyer) – The Congressional Budget Office Thursday upped the estimated cost of the Build America Bond program by $10 billion to $36 billion over 10 years in its new estimates on the fiscal 2010 budget deficit and economic outlook.

The BAB cost estimate eclipsed the CBO’s $26 billion 10-year estimate released in January. The estimate applies only to the current BAB program set to expire at the end of the year, and does not account for any proposals to extend it at a lower subsidy rate.

Legislation is currently pending in the House that would extend BABs for two years while gradually lowering the subsidy rate from the current 35% level to 30%.

The CBO noted the cost of making direct-subsidy payments to BAB issuers is “more than two-thirds” offset by higher tax revenues reaped by the taxable bonds. In its March analysis of President Obama’s fiscal 2011 budget, the CBO said extending BABs at a 28% reduced subsidy would increase outlays by $88 billion from 2011 through 2020.

But the net cost to taxpayers would be $8 billion, thanks to $80 billion in increased tax revenue generated by BABs. The program cost the government less than $500 million in 2009 and is expected to cost $2 billion for 2010, the CBO said. State and local governments have issued $125.6 billion of the bonds through Wednesday.

The CBO’s current BAB estimate is included in its updated cost estimates for the American Recovery and Reinvestment Act. The stimulus law is now expected to add $392 billion to the deficit in 2010 and $814 billion through 2019 — $48 billion less than the agency’s January estimate on the 10-year ARRA cost.

The CBO also revised lower its total deficit estimate for fiscal 2010 to 9.1% of gross domestic product from the 9.2% estimated in January. The federal government had a 9.9% deficit-to-GDP ratio in fiscal 2009, the largest since World War II. The total debt held by the public for fiscal 2010 was revised higher to $61.6 billion from $60.3 billion.

The CBO’s estimate assumes that the tax cuts signed by President George W. Bush in 2001 and 2003, plus tax cuts enacted as part of ARRA, will expire at the end of the year. As a result, the office expects the deficit-to-GDP ratio will shrink to 2.5% by 2014. Obama has proposed extending the tax cuts except for the two highest tax brackets, which are slated to return to 36% and 39.6% in 2011.

On the economy, the CBO revised higher its estimate for fiscal 2010 real GDP growth to 3.0% from its 2.2% January estimate. Real GDP in 2011 was revised higher to 2.1% from 1.9%. The office expects the unemployment rate to average 9.5% for the year and to decline to 9.0% next year.

The Federal Reserve will not begin to raise interest rates until early 2012, the CBO estimates. It added that since the Fed “has never conducted monetary policy with such large holdings of assets and liabilities, it might have some operational difficultly in calibrating the removal of that stimulus.”

The 10-year Treasury note will have an average yield of 3.4% for 2010 and will increase to 3.5% for 2011, the CBO said. Net interest the government will pay on debt held by the public was revised higher to $202 billion in 2010 from $187 billion in 2009.

The increase stems from higher inflation this year, which will add to the cost of the Treasury Department’s inflation-protected securities as well as the sharply higher level of debt issued this year.

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(The Bond Buyer) – House Ways and Means Committee chairman Sander Levin Wednesday introduced a new bill that enables Congress to make another attempt at extending several bond provisions slated to expire at the end of the year, including Build America Bonds.

The Investing In American Jobs and Closing Tax Loopholes Act — HR 5893 — would extend BABs for two years, along with other extensions to temporary bond provisions first enacted in the American Recovery and Reinvestment Act of 2009.

The bill “is about moving forward to create opportunities for Americans in America using job-creating programs such as the Build America Bonds,” Levin, a Michigan Democrat, said in a statement. “Experts have deemed these bonds, which helped support nearly two million jobs, to be one of the most successful recovery efforts in place. Republican and Democratic governors alike have praised these programs.”

House Democrats plan to bring the bill straight to the House floor and hope to pass it before Congress breaks for a month-long recess beginning Aug. 9, according to sources. The Senate would then take up the measure after the break.

The House previously passed a bill extending temporary bond provisions, but it ground to a halt in the Senate after Democrats were unable to garner 60 votes on the package to block a filibuster threatened by Republicans. The bond provisions were eventually stripped from that bill, but have found a new home in Levin’s measure.

The legislation would gradually reduce the subsidy rate for BABs from the current 35% level to 32% for bonds sold in 2011, and 30% for those sold in 2012.

“National League of Cities is certainly pleased that the chairman has recognized … that these important provisions need to be extended,” said Lars Etzkorn, program director of the NLC’s center for federal relations.

The NLC was one of six groups that sent a letter earlier this month to senators urging them to pass a BAB extension, saying the program has provided critical assistance to state and local governments during times of extraordinary budgetary pressures. Issuers have sold nearly $120 billion of the securities since passage of the ARRA last year, according to data from Thomson Reuters.

Levin’s bill also includes an extension to another muni provision that encouraged banks to buy more tax-exempt debt from smaller issuers. It would extend by one year, through 2011, the greater small-issuer exemption for bank-qualified bonds.

The ARRA modified the tax law to allow banks to deduct 80% of the costs of buying and carrying tax-exempt debt sold by borrowers whose annual issuance is no greater than $30 million, up from $10 million. It also allowed for the $30 million limit to be applied to individual borrowers participating in conduit deals, rather than at the conduit-issuer level.

“We appreciate and welcome chairman Levin’s leadership in continuing to emphasize the relationship between municipal finance liberalization, stimulus and jobs,” said Charles Samuels, a lawyer with Mintz Levin Cohn Ferris Glovsky & Popeo PC and counsel to the National Association of Health and Educational Facilities Finance Authorities. “Nonprofit education and health continue to need access on reasonable terms to the capital market.”

Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center, also threw her support behind the bank-qualified debt provision, saying it is “vital for smaller local governments to be able to issue debt efficiently and in a cost-effective manner.”

The bill also would extend for one year the programs for recovery zone economic development bonds and recovery zone facility bonds. It would also allocate an additional $10 billion and $15 billion to the programs, respectively. And the bond authority would be allocated using a new formula that would guarantee each locality receives a minimum allocation equal to at least its share of national unemployment as of December 2009.

The bill also would extend for one year, through 2011, the exemption from the alternative minimum tax for all private-activity bonds, including those issued to refund debt sold after 2003. It also would exempt water and sewer exempt-facility bonds from state volume caps for PABs, and allow Federal Home Loan Banks to guarantee tax-exempt bonds through 2011.

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(The Bond Buyer) – A draft bill released by House Ways and Means Committee chairman Sander Levin late Monday would authorize over $5 billion in new bond authority for renewable energy projects and open the door for private-activity bonds to be used by states and localities to finance energy-efficient upgrades to residential homes.

The bill does not include highly sought extensions of several high-profile bond programs that were authorized by the American Recovery and Reinvestment Act — including Build America Bonds.

But that’s no reason to panic, according to sources and market participants, who remain optimistic that lawmakers will take another crack at legislation extending BABs and other expiring tax-law provisions during the coming weeks.

BABs were excluded from the energy bill primarily because they are not energy-related, a congressional source said.

The House had approved a two-year extension for BABs in jobs legislation it passed last month. But the BABs and other bond program and tax law extensions were carved out of the legislation after lawmakers in the Senate failed to garner enough votes to limit debate and avoid a filibuster. President Obama signed the much narrower bill last week.

The draft Domestic Manufacturing and Energy Jobs Act of 2010 unveiled by Levin would authorize an additional $3.5 billion of clean renewable energy bonds, 60% of which would be allocated to public power providers with the remaining 40% going to rural electric cooperatives.

It also would expand the use of CREBs to include energy storage systems and certain biogas equipment. CREBs can be issued as either tax-credit bonds or direct-pay bonds like BABs.

In the direct-pay mode, issuers would receive subsidy payments equal to 70% of interest costs.

The Joint Tax Committee estimated the CREBs provision would cost $1.391 billion over 10 years.

The Levin draft legislation also would authorize $2.4 billion of a new type of tax-credit bond — home energy conservation bonds — that the Treasury Department would allocate to state and local governments.

The bonds could be used to finance residential energy-efficiency assistance programs, provided at least 20% of the proceeds are used to make low-income energy efficiency assistance grants and loans, and at least 10% are used to make “very low-income residential energy efficiency assistance grants,” according to the legislative text.

Like CREBs, issuers would have the option of issuing the bonds as tax-credit or direct-pay bonds.

The provision is estimated to cost $1.252 billion over 10 years.

The legislation also would allow states and localities to issue private-activity bonds to finance homeowner energy-efficiency upgrades and retrofits as part of a property assessed clean-energy program.

The PACE programs have been adopted by 21 states and the District of Columbia. Under the programs, tax-exempt bond proceeds are used to finance the “green” upgrades and are eventually paid back by homeowners via a special assessment on their property taxes.

The provision is estimated to cost $730 million over 10 years by the Joint Tax Ccommittee.

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(The Bond Buyer) – House Ways and Means Committee chairman Sander Levin plans next week to unveil new jobs legislation that would extend Build America Bonds and other muni bond initiatives that are set to expire at the end of the year.

The Michigan Democrat talked to reporters about the jobs bill late last week. A source said the bill will include many of the same bond provisions in earlier jobs legislation the committee approved March 18. It was passed by the House a week later but never gained any traction in the Senate.

The new legislation will be a more streamlined version of the previous bill, with the hope that it will pick up more support and have a better chance of enactment, the source said.

Municipal market participants have been urging lawmakers to extend the BAB program and other bond provisions originally enacted as part of the American Recovery and Reinvestment Act before their year-end expiration dates.

In the earlier House bill, dubbed the Small Business and Infrastructure Jobs Act, the BAB program would have been extended until April 1, 2013, and the current subsidy rate — 35% of interest costs — would have been lowered annually to 33% in 2011, 31% in 2012, and 30% during the first three months of 2013.

That legislation also would have doubled in size the two recovery zone bond programs to $50 billion. It would have authorized an additional $10 billion and $15 billion of economic development bonds and facility bonds, respectively, with the proviso that each municipality receive an allocation equal to at least its share of national unemployment as of December 2009.

The recovery zone economic development and exempt facility bond programs originally were created as part of the ARRA, with issuers authorized to sell an initial $10 billion and $15 billion of the bonds, respectively, for economically distressed areas.

The bill also would have extended through 2011 a stimulus provision exempting all new private-activity bonds from the alternative minimum tax, including bonds refunding debt sold during and after 2003.

In addition, state and local governments would have been able to sell PABs for water and sewer facilities without being limited by state volume caps.

Further, tribal governments would have been permitted to issue private-­activity bonds for sewage and ­water supply facilities without being subject to PAB volume caps or the “essential government function” test that normally limits a tribe’s use of tax-exempt ­financing.

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(Bloomberg) – The U.S. Senate plans to take up the financial-regulation bill on July 15 as Democrats secured the 60 votes needed to enact the biggest rewrite of Wall Street rules since the Great Depression.

Majority Leader Harry Reid said he will file a procedural motion today that will permit the Senate to take final action by the end of this week and send the bill to President Barack Obama’s desk.

“We’re cleaning up Wall Street,” said Reid, a Nevada Democrat. “We’re going to make sure big bankers never again gamble away our future.”

The decision to seek a vote comes after Republicans Scott Brown of Massachusetts and Olympia Snowe and Susan Collins, both of Maine, said they would back the bill. Senator Ben Nelson, a Nebraska Democrat, announced today he would vote yes after telling reporters yesterday he was undecided.

Their support gives Democrats the 60 votes needed to end debate in the chamber and move to a final vote, which will require a simple majority. Reid said the final vote could come as late as July 17.

“We listened to them carefully and I’m very appreciative of their support,” Senator Christopher Dodd, a Connecticut Democrat and the lead architect of the legislation, said today of the three New England Republicans.

The House of Representatives approved the legislation on June 30, five days after lawmakers worked through a 20-hour marathon session to merge versions approved separately by the House and Senate.

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(Bloomberg) – The U.S. Senate’s failure to pass legislation extending unemployment benefits also set back efforts to prolong the Build America Bond program, the fastest- growing part of the $2.8 trillion municipal securities market.

The effort to keep the expiring Build America program alive through 2012 was included in the unemployment bill rejected by Senate Republicans yesterday. The measure passed the House of Representatives last month.

Build America securities were created last year as part of President Barack Obama’s economic-stimulus package to help ease borrowing by state and local governments. The program is set to expire Dec. 31. Failure to extend it may dampen investor interest in the debt by limiting the size of the market, said John Hallacy, a municipal strategist in New York for Bank of America Merrill Lynch.

“The market is a little unsettled because of it,” Hallacy said in an interview today. “There’s an antispending sentiment developing in Congress and people are wondering if the extension is going to get caught up in it.”

The extra yield on Build America Bonds above U.S. Treasuries has risen to about 1.9 percentage points from about 1.5 percentage points in May, according to a Bank of America research note sent to clients today. Hallacy attributed some of that jump to concern that the extension would fail, which could make the securities more difficult to resell after the legislation lapses.

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